Financial Planning Through SWP
Financial goal fulfilment needs financial planning and mutual funds are one of the best ways to accomplish your medium to long term goals. However, financial planning without systematic and disciplined approach may not be successful. Thus the mantra for a happy and fulfilling investment experience is 'being systematic'.
In fact, market cycles, economic crises, geopolitical tensions or even a pandemic cannot derail your goal-focused investment planning if you are systematic. No matter how small your monthly investment is, what is important is its consistent nature across multiple market cycles. This is the key for a successful wealth creation over the long-term.
However, when it comes to systematic approach, often investors assume that it only means investing in a systematic manner. But what is important to note here is that a systematic withdrawal through SWP (Systematic Withdrawal Plan) also plays quite an important role. SWP aids not only in meeting the goals but also in further extending the wealth creation journey in an efficient way.
What is SWP?
Simply put, systematic withdrawal plan (SWP) is an investment feature which is nothing but the opposite of SIP in the wealth creation journey. SIP helps in accumulating wealth over the long-term by continuously investing in a systematic way while SWP helps in generating continuous cash flows from the accumulated wealth in a systematic manner to meet your goals.
For instance, long-term financial goals like retirement or attaining financial independence can be effectively and sustainably met with SWP. This feature ensures you get a desired lump sum amount every month by liquidating a proportionate number of units to honour the required sum. Meanwhile, the balance units continue to remain invested and keep growing in value with time.
Benefits of SWP in Financial Planning
SWP is an effective tool to harness your wealth in a staggered manner from the accumulated corpus. Using SWP in your financial planning serves various purposes.
Since the accumulated corpus tends to be large, you may not need the entire amount at one go. It is often observed, investors are unable to manage large corpus and end up making mistakes. This is where SWP can help by discouraging investors from complete withdrawal, and instead opt for a staggered withdrawal as per the need of the time.
Secondly, opting for SWP helps in keeping your investment journey on track. Since only a partial withdrawal is made every time, the value of the rest of the units keep growing over time, thereby creating more wealth. For instance, let us assume the accumulated corpus is Rs 1 crore at the time of your retirement and your monthly requirement is Rs 50,000 which rises 10% every year taking inflation into account.
If you keep this amount saved and withdraw the required sum every month, the corpus would last merely for a little more than 10 years. However, if you keep the corpus in a hybrid fund with a return expectation of 10%, you can continue to reap the withdrawal benefits for over 17 years. In case if the risk appetite is high and you opt for an equity fund like a large cap fund with return assumption of 12%, you can comfortably sustain your inflation-adjusted expenses for a little over 20 years.
Why Should You Consider SWP?
Inflation is a menace which is often ignored by investors. Inflation can single-handedly dent your pocket, as it is compounding in nature. The end result is neither can you sustain your lifestyle nor meet your financial goals. What you have to remember is that for achieving long-term financial goal like retirement, there is no loan available. You have to work towards achieving the objective.
What this means is that you would have to create a source of income which will help generate cash flow to help meet your expenses on a regular basis for as long as you live. Here, you can opt for SWP which will help create an effective way for generating cash flows.
To conclude, when investing, SIP and SWP is a powerful combination which can do wonders, if one patiently invests for decades. SIP helps create wealth while SWP takes the story further by generating sustained cash flows and yet increasing your wealth.
About Author
Pankaj Krishnani, Mutual Fund Distributor
